The owner of Crystal Tower, a large apartment building in East Cleveland, was one of two major landlords who sued East Cleveland last year over an increase in occupancy fees for rental housing. On Monday, a Cuyahoga County judge sided with the landlords and threw out the city's occupancy-fee law, calling it an "illegal tax."
(Marvin Fong/Plain Dealer file)

EAST CLEVELAND, Ohio - A Cuyahoga County judge tossed out East Cleveland's rental-fee law on Monday, deeming the cash-strapped city's annual occupancy charge on apartments and rental homes unconstitutional.

The decision came seven months after two major Northeast Ohio landlords sued the city over a 900 percent hike in annual occupancy fees, which climbed from $10 to $100 a unit - with no cap. Common Pleas Court Judge Shannon Gallagher ultimately agreed with the landlords' assertion that East Cleveland isn't providing the services, such as inspections, to justify a fee.

"The fees are in fact a tax disguised as a fee and charged solely to raise general revenues for the city," the judge wrote, pointing to case law that shows license fees should reflect public spending on whatever is being licensed.

The ruling removes, at least for now, a notable plank of East Cleveland's plan for curing a deficit that has kept the city of just over 17,000 people in a state of fiscal emergency for nearly six years.

Officials were banking on higher occupancy fees to generate close to $154,000 in new revenues annually starting this year, according to projections provided to The Plain Dealer. Aside from government grants, the fees were the largest single recovery-plan source of cash.

Willa Hemmons, the city's law director, said Monday afternoon that she hadn't yet seen the judge's decision and wasn't in a position to react. "We've got to read the opinion," she said.

In filings and past interviews, city officials argued the increased fees were justified because East Cleveland hadn't raised the costs in decades. The city pointed to other, nearby communities that charge more; however, East Cleveland misstated many of those fees.

And officials openly acknowledged during depositions that the fee hike was an attempt to raise money for the general fund - and that East Cleveland had not been inspecting apartment buildings.

Gallagher's decision prohibits the city from collecting any fees - $10, $100 or otherwise - under its existing rental-occupancy law. That doesn't mean East Cleveland can't implement a new fee. But any such charge on landlords is sure to be challenged if it's not tied to inspections.

It's unclear how many property owners have paid the $100-per-unit fee, which was due Jan. 15. Early this year, the city agreed to exempt the K&D Group and PK Management, the landlords who sued, from the increased fees during litigation.

But that dispensation didn't apply to other companies and individuals who owned rental properties in the city.

Landlords who paid under protest, reserving their right to ask for money back if the fees were found to be an illegal tax, have options. People who willingly cut a check probably don't.

K&D Group and PK Management own and manage a combined total of nearly 1,000 apartments in East Cleveland.

The East Cleveland dispute cropped up at a time of increased pushback against local government efforts to inspect and levy fees on real estate. Across the state, cities face lawsuits and disputes over where their regulatory rights end and where private property rights begin.

Majeed Makhlouf, an attorney who represented K&D and PK Management, noted that his clients did not challenge the overall legitimacy of occupancy-fee programs. The companies pay similar fees in other communities

But Makhlouf, a former Cuyahoga County law director, said that "cities cannot be looking to fees to cover shortfalls in tax revenue. ... It started with East Cleveland, but I have no doubt that it will move to other cities, if there are abuses."